The Northern borders: Dispelling fears about the Investment Canada Act

Melanie Aitken, co-chair of competition, antitrust and foreign development at Bennett Jones

With the world’s longest and most commerce-active border, the United States and Canada have maintained an intimate relationship for over two centuries. A shared cultural heritage, trade necessities and proximity have meant that the two nations have grown up together, and by virtue of this, have grown to rely heavily on one another.

“It’s’ very hard to find a substantive client in the United States that doesn’t have a Canadian operation or vice versa… The fact of the matter is that many of them act like there isn’t a border there. If you look, for example, at the Fortune 500, of those 500, more than 450 have operations on both sides of the border, and of those 450, 90 percent of them talk about North American operations, not Canadian operations versus U.S. operations,” says Joe Andrew, global chair of Dentons.

In 2012, U.S. exports to Canada totaled $292 billion and imports another $324 billion. With money like that at stake, it’s imperative for U.S. enterprises to evaluate the way business is conducted with their neighbors to the north.

Opportunities abound on either side of the border, but keeping in mind some key issues and having a solid counsel to lean on is essential to success.

Invest Canada

“Something like 78 percent of the remaining oil and gas reserves in the world are owned by state-owned enterprises (SOEs) in one form or another, and of the remaining 22 percent of known reserves that are therefore available for private industry to develop and produce, 50 percent of that is located in Alberta in Canada. So it’s attracted a lot of interest over many years,” says Bill Jenkins, global vice-chair of Dentons.

For foreign entities, including those in the United States, interest and investment in Canadian-owned resources and companies requires political approval mandated by the Investment Canada Act. The act gives the Canadian government the right to the, “review of significant investments in Canada by non-Canadians in order to ensure such benefit to Canada.”

“The Investment Canada Act restricts certain foreign investments which are not considered a ‘net-benefit’ to Canada. Meanwhile, the Commissioner of Competition must be notified of mergers exceeding certain thresholds, which may be subject to review under the Competition Act to assess whether they will substantially lessen or prevent competition,” says Brian Facey partner at Blake, Cassels & Graydon LLP.

Melanie Aitken, co-chair of competition, antitrust and foreign development at Bennett Jones says, “The issue of foreign investment review has attracted disproportionate attention recently, and for good reason. The government’s enhanced interest is largely driven by concerns around SOE (State Owned Enterprises) investors and, plainly, Chinese government players. The government is concerned to probe whether the proposed investors are directly or indirectly influenced by their government, particularly when they are looking to invest in Canadian resources or infrastructure that might touch on sensitive networks.”

Perhaps the best known rejection of an SOE seeking to purchase a Canadian asset came in 2010, when Australian mining corporation BHP Billiton made a bid of close to $40 billion to acquire the Potash Corp. of Saskatchewan. A vital ingredient in fertilizer and one of the provinces largest sources of income, the potash reserves were deemed a “strategic resource” and the deal was struck down by the Canadian government.

Jenkins says. “The the largest investment made by a Chinese SOE was completed last year, in a $16 billion takeover of a Calgary-based business with international operations. That acquisition was approved, but it took a while; the government indicated at that time that it would be the last approval it would give to a state-owned enterprise to buy a significant oil sands deposit in Canada absent special circumstances.”

Essentially closing the market to outside entities, coupled with higher profile rejections of offers in the billions, could potentially raise concerns for investors and business partners in the U.S. However, Jenkins says that subjecting an investment to ICA review should not be a deterrent for U.S.-based corporations.

“The ICA is relatively benign for investors from the United States,” he says. “While there is a review process, the level at which the review becomes necessary if the investor is U.S. based is quite high…It’s a regulatory process, but it’s typically not that difficult.”

Aitken echoes that notion saying, “The reality is that very few deals are being blocked. There’s no reasonable basis to expect that the government’s recently enhanced powers (explicitly to examine the degree of government influence, or to deem a minority investment ‘control’) is going to be broadly used outside the oil sands, certain natural resources or assets (like telecom) that raise national security concerns …That said, what may have been a bit of a rollover in the past is no longer in all circumstances…You now have more things to consider: helping to draft the narrative for the government, for example, and getting out in front of the issues before there’s too much stress in the system…Foreign investment is legitimately drawing more interest than it did in the past, but what it primarily signals is the need for good advice and support as you design and navigate the deal through.”

Gaining support

While the permeable membrane between the U.S. and Canada may encourage the proliferation of commerce, for the legal department, that story of reliance and common interest doesn’t always translate to ease in business dealings.

Alarmingly, up until very recently, no law firms were straddling the border to support the complex and constant flow of trade between the two nations exclusively, says Andrew. “Until Bill (Jenkins), led the charge to bring Dentons together, There was not a single combination of law firms that had significant presence in both Canada and the United States until last year.“

With that in mind, finding counsel with the unique perspective to guide cross-border transactions is essential for success, and can be difficult to find.

“Canada is a very big country physically; we only have a bit more 30 million people, or about 10 percent of the population of the U.S. but the country covers six time zones. The thing to remember is that you can’t take a one-size-fits-all approach to Canada,” Jenkins says.

“It’s a country as wide and as diverse as the United States… making sure you have counsel that’s sophisticated enough understand those distinctions, and has offices in the metropolitan areas that have those distinctions is essential,” Andrew says. “Just in the same way that you wouldn’t do the same thing in San Francisco courts as you would in Birmingham, Alabama, you shouldn’t treat Canada as if it were a monolith either.”

In that vein, Seamus Woods partner at Blake, Cassels & Graydon LLP says, “U.S. GCs should remember that Canada is a federal rather than unitary state, and that many matters are governed by provincial rather than federal law. A further complication is that while most of the country is governed by common law systems, Quebec has a civil law system which is very different.”

The list of business implications stemming from U.S.-Canadian relations is almost as longs as the border itself, and no single article can address them with any reasonable focus. But with the United States just now lurching from the financial crisis, understanding the variables at play between these two trading giants is more important than ever. Only through that understanding and mutual respect can these tacitly linked nations and areas continue to mutually benefit for another two centuries.